This is probably going to be my last post on the philosophy of economics. Some recent events have led me to reassess my priorities.
I’m not abandoning politics or economics. I would just rather use this blog to write about the history of logic, and philosophy more generally. That fits my title better anyway. I’ve also come to the unwelcome conclusion that I’m quite bad at economics, whereas I have to hope that I’m not a terrible historian of philosophy.
What I’d like to do here is concede how much I now think I was wrong about and how much Simon Wren-Lewis was right about. A lot of this also applies to Nick Rowe, who has also been kind enough to engage with me over the last year or so.
First, I think that Wren-Lewis was probably largely right about MMT. His complaints were directed against the hard core of MMT supporters online, not the actual developers of the theory. He had two complaints:
MMT seems obsessed with the accounting detail of government transactions
This seemed to lead to ideas that I thought were standard bits of macroeconomics
Now I think both complaints are quite fair, again if applied to the MMT fan base online rather than to Mosler, Kelton, Wray, Mitchell, Tcherneva, and the rest of the proper MMT theorists. In the blogosphere, I would add that they don’t apply to people like Eric Tymoigne, Brian Romanchuk, and Neil Wilson.
Let me say something, however, about “standard bits of macroeconomics”. Wren-Lewis later pointed out that he is writing about “a world where monetary policy did successfully control demand and inflation”. That is the world of mainstream macro. And he is absolutely right that in that world – given that premise – all the accounting details in the world don’t show his story to be deficient in any way.
In that world, fiscal policy is neither needed nor effective as a macroeconomic stabilisation tool. It is not needed, since by definition demand is managed by monetary policy. And it is not effective, since monetary policy will just adjust to counteract any effects of fiscal policy on demand and inflation that diverge from its targets.
The logic here is faultless. But I, like many others, fell into the trap of trying to pick holes in it by way of facts about accounting. The truth is, if there is a problem with what Wren-Lewis says, it is not with the internal logic of his model; it is with its applicability to the real world.
What Wren-Lewis didn’t know about MMT, and couldn’t have known given the typical comments on his blog, is that it takes for granted a belief (implicitly founded I think on Post-Keynesian microeconomic theory) that interest rates just don’t work the way that they’re assumed to work in standard economics. This was then pointed out to him; he acknowledged it and then implied that it seems to be belied by the empirical evidence.
Again, the proper MMT reply here is subtle. The point is that even if monetary policy does work in the way presumed, it can have terrible unforeseen consequences. Another part of MMT that Wren-Lewis couldn’t possibly have seen (because nobody showed it to him) is its dependence on a Minksyan theory of financial instability: if loose monetary policy works to increase demand, for instance, it also increases instability in the financial markets, because those markets are inherently unstable. Randall Wray’s recent book on Minsky makes this case with admirable clarity.
The proper answer to Wren-Lewis, then, is that he should not be writing about a world in which monetary policy succeeds in controlling demand and inflation. Even if monetary policy is able to do that, the cost is too high: it sets up the conditions for financial collapse. But proving this requires an awful lot of Minskyan and Post-Keynesian theory, about how market signalling doesn’t work in the way assumed, about how people are not rational in the textbook sense, about how prices are largely set through convention rather than through competitive pressure, and so on. In other words, digging below the macro and into the micro is the only way to prove the case against mainstream macro.
What does not work is repeated assertions about the way that government spending works. Wren-Lewis gets this absolutely right. Such facts might be surprising to the general public and probably many micro- and applied economists. They undermine what he calls “mediamacro”. But they are not surprising to macroeconomists. MMTers are wasting an awful lot of time and energy on pointing out such facts when what they need is to promote the pricing theory, capital theory, and theory of financial instability that underpins their fundamental claims.
Again, let me be clear. The main MMT theorists have been making this case for a long time. And they are trying to get it out into the public; just look at Eric Tymoigne’s recent blog series on money and banking. But it hasn’t sunk in with the online MMT fanbase, who still think the problem is that macroeconomists don’t understand government accounting.
I know this because I made the same mistake myself for a long time. The trouble, I think, was that I wanted to have something to contribute to the conversation, and price theory, capital theory, and theories of asset pricing are really beyond my understanding. Accounting I do understand, and so I hoped that that might be enough to make the case for what I believe on instinct. I think a lot of others in the MMT fanbase fall into the same trap. But it is a trap.
I still believe the same things about policy – again, largely on instinct. And I do think that philosophy is useful in terms of clarifying concepts and arranging our moral and social priorities. I also still think that there is an interesting political philosophy contained in MMT that deserves more discussion. But frankly I lack the expertise to make the case I wanted to make. Luckily there are others to do so, but no intellectual shortcuts please. All excellent things are as difficult as they are rare.